Let’s start with a math problem.
To begin, take the total sum of your payroll. Now, calculate 10% of that figure. Ask yourself, “Can I afford to pay this amount in the form of a penalty?” Maybe… But why pay it if you don’t have to?
Payroll tax errors can cost your small business a hefty sum in fines, but it can be challenging to keep track of all the policies in place - especially if you operate across state lines. There are dozens of complex regulations, and it feels like they constantly change. In short, the thought of payroll tax liabilities can get overwhelming.
Payroll taxes for your small business don’t have to be a headache. Let’s examine some of the nexus payroll policies you should watch to ensure you’re compliant in 2022.
What Are Nexus Policies?
Before we dive into the specific policies to focus on for the upcoming tax year, let’s address an essential question: What are nexus payroll policies?
Nexus payroll policies refer to the connection between your business and the state and possibly city taxes your company operates. Nexus dictates whether or not you need to withhold state or city taxes. In other words: Is your business “present” enough in a given location to warrant tax payments for that location?
How do you know if your business has a nexus in a given city or state? The answer to this question varies by location. Your business can achieve nexus, for example, by having an office or store in a locality.
ConnectPay understands that, as a small business owner, you have a lot of hats to wear. If you’re interested in taking off one of those hats and outsourcing your payroll to a company you can trust, schedule a call with ConnectPay today! Read on to see the three nexus payroll policies you should make sure you consider for 2022.
Reciprocal agreements are sometimes referred to simply as “reciprocity” and are relevant for payroll compliance for multi-state employers. If two states have a reciprocal agreement, taxpayers who live in one state and work in another can be exempted from paying taxes in both states. You can review a list of states that have reciprocal agreements and the required forms associated with those agreements here.
These agreements may be essential to understand when it comes to nexus payroll policies for future tax seasons because of the explosion of remote work in the past year. Currently, authorities are debating whether or not an employee’s home office qualifies as a nexus for your company. If it is determined that this qualifies, this is something you will need to plan for in future years, as your employees are required to pay income tax for any state in which your business has nexus.
Since more workers are 100% remote, a more significant number of your employees may now be working from home offices far enough from your business that there are no reciprocal agreements between your state of operations and their home state. This will require special consideration, as income taxes will now apply for both you and your affected employees in both states.
Unemployment tax falls into two categories, Federal Unemployment Tax (FUTA), and State Unemployment Tax (SUTA). These are taxes that businesses pay to the IRS for funding state and federal unemployment programs. These programs offer financial support to employees who are terminated.
Related read: 5 Ways to Lower Your SUTA Tax Rate
Regarding unemployment and nexus policies, we have some good news: income tax nexus rules don’t apply to state unemployment insurance. Essentially, this means that you will only need to report employee wages to the state where most of each employee’s work is performed. Suppose you have an employee that doesn’t have a general “base of operations,” for example. In that case, with a traveling sales representative who operates equally across several states, that employee’s state of residence can be used as their reporting state.
Local taxes are any taxes from a locality. This can include counties, cities, and school districts. These taxes are often withholding taxes, meaning you need to withhold them from your employees’ paychecks if they live or work in an appropriate location.
Local taxes are vital regarding nexus policies. Even if your business has nexus with a state, you may not have nexus with the city or municipality where the local tax applies. For example, the city of Detroit has local taxes. Just because you have nexus in the state of Michigan, that does not mean you have nexus in Detroit as well.
Be sure to examine your employees’ living and working locations to ensure you are taking all applicable local taxes into account.
Nexus Payroll Policies to Track for 2022
Keeping an eye on these three elements should help you keep your nexus-related payroll calculations in line for the upcoming tax season. Even if you don’t operate across state lines, you may have different city taxes or taxes from other localities you need to keep in mind, so be sure to do your research. You’ll also want to keep a close eye on the decisions made regarding remote employees with home offices. Mistakes come tax time can result in hefty fines we’re sure you’d rather not have to pay.
Researching and wrapping your head around the nuances and changes in tax law each year can be stressful and time-consuming. This is why it is beneficial to partner with a payroll and HR expert to help you manage your taxes accurately and efficiently. ConnectPay has a team of tax experts on staff who are always ready to answer your call during business hours. We also have programs in place to partner your company with outside experts for advice on any local laws or regulations our core staff is less familiar with, ensuring that you always get the right answer.